Fed May Pare Bond Buying in 2021, but No Rate Hike Yet

Powell sees progress on inflation, employment fronts

A grocery's cashier checking out products.
•••

Tempura / Getty Images

If the Federal Reserve decides to remove some of its support for the economy later this year, as it previously signaled, higher interest rates would not necessarily soon follow, Federal Reserve Chair Jerome Powell said Friday at the central bank’s annual economic symposium.

Key Takeaways

  • While inflation has satisfied the Federal Reserve’s goal of substantial progress, the labor market isn’t there yet, Fed Chair Jerome Powell said Friday.
  • If the recovery continues as expected, the labor market will likely reach the goal soon and the Fed can start lightening its support for the economy by trimming its asset purchases by year’s end, he said.
  • A decision to pare back asset purchases would not necessarily trigger a timeline for raising benchmark interest rates, Powell added.

In remarks delivered virtually, Powell reiterated that the Fed remains committed to supporting the economy “for as long as is needed to achieve a full recovery” after COVID-19-related lockdowns plunged the economy into recession last year. But he also acknowledged “the pace of the recovery has exceeded expectations,” with the economy now meeting the Fed’s test of “substantial further progress” toward its 2% average inflation goal over the long term, and “clear progress” toward maximum employment.

When the pandemic struck last year, the central bank took aggressive steps to ensure that money continued flowing through the economy by cutting interest rates to near zero and embarking on a massive bond-buying program. Now, with inflation accelerating amid the economic rebound and more progress on the labor front expected in the coming months, Powell said the Fed may start pulling back some support by paring its bond purchases later this year. Inflation as measured by July personal consumption expenditures over 12 months rose 4.2% (and 3.6% without the volatile food and energy components). That’s above the Fed’s 2% target, but still viewed by Powell as mostly transitory and therefore not worrisome.

At the Fed’s last policy meeting in July, Powell recalled Friday, “I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year. The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the delta variant. We will be carefully assessing incoming data and the evolving risks.”

‘Stringent Test’ for Rates

Powell was quick to note, however, that reducing asset purchases doesn’t signal a timeline for raising benchmark interest rates. For rate hikes, “we have articulated a different and substantially more stringent test,” he said.

Rates are expected to stay at their current low levels “until the economy reaches conditions consistent with maximum employment, and inflation has reached 2% and is on track to moderately exceed 2% for some time,” Powell said. “We have much ground to cover to reach maximum employment.” 

In quarterly projections by Fed members in June, the median forecast indicated that any interest rate hike wouldn’t come until  2023 The Fed’s next meeting will be September 21-22 and include the release of its updated quarterly projections.

Have a question, comment, or story to share? You can reach Medora at medoralee@thebalance.com